MacColl re-emerges in the British charts in December 1987, reaching Number 2 with The Pogues on “Fairytale of New York,” a duet with Shane MacGowan. This leads to her accompanying The Pogues on their British and European tour in 1988.

After the contract issue is resolved, MacColl returns to recording as a solo artist and receives critical acclaim upon the release of Kite in 1989. While continuing to write and record, she is also featured on the British sketch comedy French and Saunders.

In 2000, following her participation in the presentation of a radio programme for the British Broadcasting Corporation in Cuba, MacColl takes a holiday in Cozumel, Mexico, with her sons and her partner, musician James Knight. On December 18, she and her sons go diving at the Chankanaab reef, part of the National Marine Park of Cozumel, in a designated diving area that watercraft are restricted from entering. With the group is a local veteran divemaster, Iván Díaz. As the group is surfacing from a dive, a powerboat moving at high speed enters the restricted area. MacColl sees the boat coming before her sons. Louis, then 13, is not in its path, but 15-year-old Jamie is. She is able to push him out of the way but in doing so she is struck by the boat and dies instantly. MacColl’s body is repatriated to the United Kingdom and is cremated after a humanist funeral at Mortlake Crematorium in South-West London.

In 2001, a bench is placed by the southern entrance to London’s Soho Square as a memorial to MacColl, after a lyric from one of her most poignant songs: “One day I’ll be waiting there / No empty bench in Soho Square.” Every year on the Sunday nearest her October 10 birthday, fans from all over the world hold a gathering at the bench to pay tribute to her and sing her songs.

MacColl’s collaboration with the Pogues, “Fairytale of New York,” remains a perennial Christmas favourite. In 2004, 2005, and 2006, it is voted favourite Christmas song in a poll by music video channel VH1. The song is re-released in the United Kingdom in December 2005, with proceeds being split between the Justice for Kirsty Campaign and charities for the homeless. The re-release reaches number 3 on the U.K. charts, and spends five weeks in the top 75 over the Christmas and New Year period. It reaches the top 10 for the third time in its history in 2006, peaking at number 6, and charts yet again in December 2007. The song also makes the Top 20 in subsequent years, and has spent more time in the top 20 than any other song.